The market's rocketing. Bombs are dropping. And you're feeling the urge to do something to your portfolio.
But neither a rally nor a war should change the basic way you invest. How much money you should have in stocks, bonds and cash largely depends on how old you are -- not on the minute-to-minute updates coming out of Baghdad.
If you know what you own and if your allocations are in order, then you should do nothing. To borrow a quote from Warren Buffett: "Occasionally, successful investing requires inactivity."
But if you haven't touched your portfolio in six months or more, then now is a good time to inspect it. Here are some guidelines to follow.
Time On Your Side
You have decades to invest if you're just in your 20s or 30s. And when you're putting away money for your retirement, you will want to keep most of it in stocks. Of course, that's assuming you can cope with the wild swings in the market.
You shouldn't expect the market to deliver the intoxicating gains you saw during the '90s. But over the long haul, you should be able to make more money in stocks than in bonds. Over the last 10 years, the 8% annualized return on the
Total Stock Market Index fund, which tracks the entire U.S. stock market, still beats the 7% return on the firm's
Total Bond Market fund. And that's after a wrenching three-year bear market for stocks and a bull run for bonds. In terms of valuations, stocks are more attractive than Treasuries right now.
If you want to be aggressive, you can keep 80% of your money in stocks (spread among large, small and international stocks) with the remainder in bonds and cash.
A Little More Protection
The less time you have to invest, the more of your money you should keep in safer assets. If you're in your 40s or 50s, you still have 10 to 20 years before retirement, but you should start moving more of your money into bonds and cash. A 60/40 allocation between stocks and bonds is a solid plan for someone who doesn't need current income from that portfolio and wants growth from those investments.
If you haven't looked at your allocation lately, now is a good time to bring it back in line. If you started 2002 with $5,000 in a broad stock market fund and $5,000 in a diversified bond fund, your portfolio would have had 42% in stocks and 58% in bonds at the end of 12 months. By rebalancing back to a 50/50 mix, you're keeping the portfolio from becoming a little too conservative. And you're taking some profits in bonds and putting some money into stocks, which look reasonably priced right now.
But maybe you're also investing to, say, buy a home or send your kids to college. If you're absolutely going to need your cash in at least the next five if not 10 years, then it shouldn't be in the stock market. You should sock that dough in short-term Treasuries or a money market fund.
With interest rates still at generational lows, you aren't going to make anything in a money market fund, but you won't lose any dough either.
But not all bonds are created equal. You should avoid going on a hunt for higher yields. You can and will lose money in longer-term Treasuries -- at least over short periods of time. As rates rise, the prices on those bonds can fall hard. Vanguard's Long-Term U.S. Treasury fund fell 7% back in 1994. And you cannot afford to lose even that much if you're just months away from coughing up a down payment.
Overloading a portfolio with your own company's stock can be even more dangerous that overdosing on bonds. You already work for that company. If it falls on hard times, you can lose your nest egg and your job all at one time. You shouldn't have more than 10% of your retirement money in your own company's stock. Period.
Sock It Away
Some people are simply going to have to change their behavior to make up for losses they've suffered during this bear market. That means saving more and spending less.
The savings rate in this country
much higher than it's been in about four years. In the fourth quarter of 2002, people socked away 4.3% of their income. A year earlier, the savings rate was closer to a paltry 1%.
And saving is going to become even more critical for people who work at companies that are eliminating their matching contributions in 401(k) plans. As one example of many,
just announced that it will no longer match employee 401(k) contributions.
The only solution is to save, save and then save some more.